Mid-caps vs small caps: How to choose where to invest?

Pranati Deva
Updated: 13 Dec 2021, 12:02 PM IST
TL;DR.

4 simple guides on how you can choose the best mid and small caps to invest your hard-earned money in.

4 simple guides on how you can choose the best mid and small caps to invest your hard-earned money in.

4 simple guides on how you can choose the best mid and small caps to invest your hard-earned money in.

Midcap stocks are those which have a market capitalisation of between 5,000 crore and 20,000 crore while smallcap stocks have a market capitalisation of less than 5,000 crore. While they have great growth potential and lower valuation with regard to stock prices, they can also witness a drastic decline on small triggers.

So how to choose where to invest?

Volatility and risk

Midcap stocks are considered less volatile and riskier as compared to small-cap stocks. Small Caps are riskier since they are mostly very small firms that mostly go unnoticed till a big event or trigger. Also since stock prices are considerably lower in small caps any small fall that could have been absorbed by a bigger firm will do more damage to a smallcap stock.

Growth potential

Smallcap stocks have a higher growth potential since the risk is also higher. Since they have low stock prices, what would be a small bump in stock price for say a large-cap or midcap will be a surge for a smallcap stock which in turn will give better returns. However, one must be cautious while investing in such stocks and so do proper research and be ready for volatility.

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Choosing between midcaps and smallcap

Time frame

The time frame for investing in midcap and smallcap stocks varies. While for midcaps, a 5-year time frame is considered appropriate to give the stock enough time to recover in case of a loss, it is higher for small caps which is around 7 years, since they are more volatile and may take longer to recover.

Liquidity

Lack of liquidity is a struggle for small caps. Midcaps are considered to have a better-managed liquidity position. Since small caps are traded in lesser and float lesser shares in the market, it might be difficult or take a longer time to find a buyer for a small-cap stock you want to sell at your desired price. It is comparatively easier for midcaps.

One must keep in mind all the factors before investing. Someone with a moderate risk appetite should opt for midcap stocks but must do a quality check beforehand while only a highly aggressive investor with a high-risk high reward attitude should invest in a smallcap stock.

First Published: 13 Dec 2021, 12:02 PM IST
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